How to Use Equity to Buy Property

Ever wondered what that magical word 'equity' really means in the property world? Let me break it down for you in plain speak.

What Exactly is Equity?

Think of equity like a ladder you are climbing as you pay down your mortgage or your property grows in value. It's the difference between what your property is worth and how much you still owe on your mortgage. For example, if your home is valued at $800,000 and you've got $200,000 left on your mortgage, you've got $600,000 in equity.

But Here's the Reality Check

Having $600,000 in equity doesn't mean you've got $600,000 cash sitting in your back pocket. Banks don't work that simply. They'll look at what they call 'usable equity' - and that's typically less than your total equity.

How Do Lenders Calculate Usable Equity?

Most banks are comfortable lending up to 80% of your property's value. Here's a quick breakdown:

- Property Value: $900,000

- 80% Lending Limit: $720,000

- Current Mortgage: $300,000

- Potential Usable Equity: $420,000

Can You Use Equity as a Deposit?

Absolutely! But there are some crucial things to remember. For investment properties, you'll typically need a 20% deposit. This deposit can come from your usable equity. Make sure to also factor in additional costs like stamp duty and legal fees.

What Else Can You Use Equity For?

Equity isn't just a number - it's a financial strategy. It can help you:

- Purchase investment properties

- Upgrade your home

- Buy a new car

- Invest in renovations

- Create additional wealth streams

Important Considerations:

- Usable equity is always less than total equity

- Banks have strict lending criteria

- Your property's value can fluctuate (meaning so does your equity)

- Additional costs are always part of the equation

Real-World Example

Buying an $800,000 investment property in South Australia? You'll need to budget:

- Deposit (potentially from equity)

- Stamp duty (around $45,779)

- Legal fees

- Potential lenders mortgage insurance if you have less than a 20% deposit

The Bottom Line

Equity can help you get a leg up on the property investment ladder. But it's not a magic wand - it requires strategic planning, understanding your financial position, and working with professionals who know the landscape.

Want to unlock the potential of your property's equity? Let's grab a coffee and dive into the details.